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07.19.11

Where the GOP Went Wrong on Deficits and Debt

As the deadline to avoid a government default nears, John Avlon retraces how the Republican Party abandoned fiscal responsibility in favor of reckless tax cuts and “deficits don’t matter” policies.

When did fiscal responsibility and fiscal conservatism get de-linked? 

That is the key question that underlies the fault lines in the current GOP civil war, playing out over the debt-ceiling debate as every day we get closer to default.

It’s too simple to call this a fight between the old guard and the Tea Party. The real test is whether government fiscal policy should be focused on reducing the deficit and the debt or whether the real goal is to keep taxes low at all costs. It’s a divide decades in the making between the deficit hawks and the anti-tax absolutists.  

On one side is a belief in math rooted in the businessman’s reality—profits and losses, revenues and expenditures. It is a two-way equation.  

On the other side is the blind faith that tax cuts will always ultimately pay for themselves. In a businessman’s world this imbalanced approach usually leads to bankruptcy.  

Fiscal conservatism and fiscal responsibility used to be synonymous. This was a core distinction between Republicans and Democrats. When a Republican candidate promised conservative budgets, he meant to rein in spending and reduce deficits and debts, in contrast to a belief in Keynesian social spending and the political benefits of overgenerous union contracts. The bottom line was generational responsibility.  

But now the Republican camp is divided. On one side is a Republican tradition rooted in Eisenhower and Reagan. On the other is the legacy of Grover Norquist, Tom DeLay, W., and Dick Cheney—tax cuts always comes first, and “deficits don’t matter.” 

When Dwight Eisenhower decided to run for president as a Republican after a lifetime as an independent, he was motivated in part by frustration that Democratic President Harry Truman presented a budget with a $14 billion deficit (!)—prompting an eight-page protest in Ike’s diary. In his campaign kickoff speech, he spent most of the time on fiscal matters, warning that “today, staggering federal expenditures for civil and military purposes have soared to totals beyond the comprehension of ordinary individuals … Heedless expense is an investment in bankruptcy.”  

This significance of this line of attack was that the former Allied commander knew he could call for belt-tightening in the military budget and not be called a communist sympathizer by the rising McCarthyites of the time. And while Ike was criticized by contemporary conservatives, from Robert A. Taft to William F. Buckley, for not dismantling the New Deal and failing to cut taxes significantly, his deficit-to-GDP ratio and spending to GDP stands as the lowest of any modern president.  

In 1981 Ronald Reagan laid out one of the clearest articulations of fiscal responsibility in his Inaugural Address: “You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we are not bound by that same limitation?”  

The great irony of the Gipper was that he actually increased the deficit and federal spending in his administration. But he did so reluctantly, calculating correctly—in history’s eyes—that ramping up military spending would enable him to help end the Soviet Union and defeat communism.  

But by the time Bush 41 was in office, his bipartisan deficit-reduction deal violated his prominent “no new taxes” pledge and consequently drew a crippling primary challenge in the form of Pat Buchanan’s conservative populist campaign.  

Rather than whitewashing Reagan’s fiscal record, it is helpful to view it in full. Yes, he cut taxes dramatically, spurring the kind of economic activity that comes when the top rate is cut from 70 percent to 28 percent. But he closed loopholes and broadened the tax base—including raising Social Security taxes as part of a bipartisan fix—all actions that would get him attacked as a RINO today by the anti-tax crowd that idolizes him in the abstract. And don’t forget that Reagan presided over a rise in the debt ceiling some 17 times.  

It’s a divide between the deficit hawks and the anti-tax absolutists.

The divided government of Clinton and Gingrich finally succeeded in turning the deficit into a brief, hard-won surplus as our economy boomed (after taxes were raised, spending was cut and the Internet appeared right on time). 

But when George W. Bush took office, he squandered the surplus on tax cuts whose costs were compounded by two unfunded foreign wars and a growth in domestic discretionary spending that outpaced even LBJ. This pain-free approach was encouraged by Republican House leaders like Tom DeLay and others as a way to buy a “permanent majority.” This is when de-linkage occurred; as Vice President Cheney famously told first-term Treasury Secretary Paul O’Neill, “Deficits don’t matter.”  

Contrary to contemporary myths, conservatives' support for Bush & Co. was not seriously diminished as a result of all this deficit spending. When Republican economists like Bruce Bartlett raised concerns about this de-linkage, they were drummed out of the party for disloyalty. The leading contemporary congressional critic of this spending spree was John McCain—and he was likewise derided as a RINO whose conservatism was questioned because of his principled independence. And when the Tea Party emerged in 2009, polls showed their members held an unseasonably high 70 percent approval for W., despite their anti-deficit, repudiate-the-past rhetoric.  

Now we are in the middle of a great debate about debt ceilings and deficit reduction. Advocates of fiscal responsibility want to make the best and biggest deal possible—preferably a grand bargain that would raise the debt ceiling while agreeing to spending cuts, entitlement reforms, and—yes—some revenue increases, if not outright tax hikes. The all-or-nothing crowd is focused on an anti-tax litmus test, default be damned. 

The obvious alternative—ripe for constructive compromise—is tax reform: close the loopholes that function as earmarks in the tax code and therefore raise revenue without raising tax rates. We might even be able to lower some rates as a result. This is what is called a win-win.  

But anti-tax absolutists say that any revenues raised by closing-tax loopholes must be offset by further tax cuts, making them effectively deficit neutral. Professional activists like Grover Norquist hold a pledge and a primary threat over Republicans' heads. And this position is aided by prominent conservative populists like Michele Bachmann who parade under the Tea Party banner but are more focused on litmus-test politics than actually solving problems.  

In contrast, Sen. Tom Coburn—who, on Monday, released a $9 trillion  "Back in Black” plan that would cut spending dramatically, reform entitlements, and raise some revenues—has become an example of problem-solving politics that offers policy specifics. 

And among the likely proposals that could come with a Plan B—being negotiated by Republican Senate Leader Mitch McConnell and Democratic Senate Leader Harry Reid—would be a binding bipartisan deficit-reduction panel that would likely pick up much of the plan forged by the Simpson-Bowles commission, itself a model of far-reaching fiscal responsibility.  

It doesn’t take a presidential historian to notice that in recent years Republicans have cared most about deficits when there is a Democrat in the White House. And it doesn’t take an economist to know that our current fiscal path is unsustainable.

The irony is that reasserting the Republican tradition of fiscal responsibility could be exactly what the GOP needs to restore its lost moral authority on the generational theft that is deficits and debt.